Avoiding creeping complexity

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randomizer
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Avoiding creeping complexity

Post by randomizer » Tue Sep 11, 2018 3:47 pm

There are many reasons to believe that simplicity is an investor's friend, but my favorites are:
  • Simple plans are easy to understand, implement, and stick to.
  • Simple plans often have the lower costs.
  • Simple plans are less error prone.
However, even the simplest plans can find that they accrue complexity over time. Some examples of this kind of creeping complexity from my investing history, having started from a simple target date fund in a taxable account, are:
  • Learning about 529 plans and opening accounts for my kids.
  • Switching jobs and getting access to a 401k, which meant a new account at a new financial institution.
  • Seeing my first market correction, which led me to try tax-lost harvesting, and therefore got me out of my simple target date fund.
  • Another correction, which led to more TLH and even more funds being held.
  • Learning that, due to my tax bracket, I should look into tax-exempt munis.
  • Learning about state-specific risk, so restructuring my bond holdings to hold fewer munis.
  • As wealth grew, deciding to do some estate planning, which led me to move everything into a living trust (which in turn led me to switch banks).
  • Getting a mortgage for the first time.
  • Needing to do some foreign currency transfers which led me to open an account at Interactive Brokers (which in turn led me to buy my first ETFs because I wanted to meet the minimum balance requirements to avoid monthly commissions).
  • Needing some cash at regular intervals, so buying individual treasuries, held to maturity.
  • ...
And all that in just a few short years of investing. I can only imagine how easy it is to drift even further from a three-fund portfolio if you start getting into tilts, factor-based investing, alternatives etc.

In order to simplify, I took some long-term capital gains and put my ducks back in a row with a three-fund portfolio set-up, and this time I'm really serious about keeping things simple, not just starting simple.

What do you do to stop complexity from creeping into your portfolio? Or don't you care?
87.5:12.5, EM tilt — HODL the course!

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JoMoney
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Re: Avoiding creeping complexity

Post by JoMoney » Tue Sep 11, 2018 4:02 pm

I used to have a portfolio of individual stocks. The "rebalancing" or deciding when to buy/sell was definitely a confounding situation prone to behavioral issues, tax issues, performance issues, risk... I ultra-simplified to a single broad market equity fund seasoned with enough cash and short-term bonds that I sleep well at night. Slice-n-dice portfolios have no interest to me, it would have just been trading one crazy portfolio for another crazy portfolio. I'd go back to stock-picking before "asset class" picking.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Taylor Larimore
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Re: Avoiding creeping complexity

Post by Taylor Larimore » Tue Sep 11, 2018 4:05 pm

Randomizer:

Whenever I am tempted towards complexity (which is how the industry makes its profits from our returns), I read what experts say:

What Experts Say About Simplicity

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

Mjar
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Re: Avoiding creeping complexity

Post by Mjar » Tue Sep 11, 2018 4:31 pm

randomizer wrote:
Tue Sep 11, 2018 3:47 pm
There are many reasons to believe that simplicity is an investor's friend, but my favorites are:


What do you do to stop complexity from creeping into your portfolio? Or don't you care?
If you stick a formula that you know works for you then I wouldn't worry about. My formula has in there as a part of the whole is that with new money I want to invest, can I get a better return with less risk in the new position vs one of my current positions I am happy with? If yes then I buy the new position and start seriously considering selling the poorest performing one. If no then I hold the cash for dip or buy more into a existing position when there is a slight day to day dip. This has kept from going beyond 10 different positions as of today in my accounts that is not a 401k over the last 4 years, which I just added 2 positions to the 10 in the last week, so really 8 for the last four years. The level of research I do plays a factor as well, I go in-depth to try to understand a company before I put money in so that slows me down from form adding more different positions. I feel more positions can water down your returns. If you find a core set of positions you like stick with them, let everyone else do what they want.

jebmke
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Re: Avoiding creeping complexity

Post by jebmke » Tue Sep 11, 2018 4:31 pm

randomizer wrote:
Tue Sep 11, 2018 3:47 pm
What do you do to stop complexity from creeping into your portfolio? Or don't you care?
I started down the road toward simplification when I was first contemplating retiring. That was in 2004 (the contemplation, not the retirement). I realized that I couldn't do it all at once so I made a few moves that covered a lot of the dollars and then established a rule that with every opportunity, absent tax and other costs, I would move toward a simpler structure.

The older I get, the more I realize how important this is. My ability to keep up with it isn't any different. My interest in keeping up with it declines every year. My spouse is perfectly capable of handling the finances if I go first -- she was a financial professional. But she has little to no interest.
When you discover that you are riding a dead horse, the best strategy is to dismount.

Mjar
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Re: Avoiding creeping complexity

Post by Mjar » Tue Sep 11, 2018 4:31 pm

randomizer wrote:
Tue Sep 11, 2018 3:47 pm
There are many reasons to believe that simplicity is an investor's friend, but my favorites are:


What do you do to stop complexity from creeping into your portfolio? Or don't you care?
If you stick a formula that you know works for you then I wouldn't worry about. My formula has in there as a part of the whole is that with new money I want to invest, can I get a better return with less risk in the new position vs one of my current positions I am happy with? If yes then I buy the new position and start seriously considering selling the poorest performing one. If no then I hold the cash for dip or buy more into a existing position when there is a slight day to day dip. This has kept from going beyond 10 different positions as of today in my accounts that is not a 401k over the last 4 years, which I just added 2 positions to the 10 in the last week, so really 8 for the last four years. The level of research I do plays a factor as well, I go in-depth to try to understand a company before I put money in so that slows me down from form adding more different positions. I feel more positions can water down your returns. If you find a core set of positions you like stick with them, let everyone else do what they want.

HEDGEFUNDIE
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Re: Avoiding creeping complexity

Post by HEDGEFUNDIE » Tue Sep 11, 2018 4:43 pm

I try to simplify accounts that are duplicative. For example I only have one taxable brokerage account. And I have rolled over old 401ks into my current employer 401k, except for one old 401k that has a stable value fund paying 3% guaranteed (hard to find!)

2015
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Re: Avoiding creeping complexity

Post by 2015 » Tue Sep 11, 2018 6:50 pm

In life there are maximizers and there are optimizers. Maximizers experience more stress because they are always being led around by financial barkers of all stripes (academics, websites, financial institutions, bloggers, so-called "experts", etc.) touting the latest shiny metal object. Thus, maximizers experience a high degree of FOMO, if only unconsciously. Maximizers are always fiddling, tweaking, hopping here, jumping over there. Optimizers, OTOH, experience less stress as they seek to optimize their financial life by balancing simplicity against complexity (and not the other way around).

I'm with jebmke in that the older I get the less I'm interested in maximizing my financial life at the expense of precious seconds on the clock ticking my life away. I've been around a lot of death this year and not a single person spoke of their portfolio, only a yearning for a few more seconds of life.

In the last few years one of my major projects was something I dubbed "Friction Minimization." Pre-retirement, whenever I wanted to do anything it took several steps. Through conscious and directed attention, I've reduced the number of steps in everything I do, thus reducing friction. Even a lot of my financial activities have now been relegated to habits, routines, and rituals (hat tip, Cal Newport). It's hard to explain how much of a positive impact this has made on my life.

ThankYouJack
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Re: Avoiding creeping complexity

Post by ThankYouJack » Tue Sep 11, 2018 7:15 pm

randomizer wrote:
Tue Sep 11, 2018 3:47 pm

In order to simplify, I took some long-term capital gains and put my ducks back in a row with a three-fund portfolio set-up, and this time I'm really serious about keeping things simple, not just starting simple.

What do you do to stop complexity from creeping into your portfolio? Or don't you care?
I ask myself if I can prove that the added complexity is advantageous. If so, then I factor how much time it's going to take and estimate how much I'll be saving per hour of time. I also factor in if it's going to have an impact on the date I hit my target number (highly unlikely).

Maybe I'm unique in this regard, but I've always had a 3 fund portfolio and the bigger my portfolio gets, the simpler I want it to be. I don't want to micromanage things, especially small $ things. I even check my balance a lot less and rebalance just once a year now.

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luap
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Re: Avoiding creeping complexity

Post by luap » Tue Sep 11, 2018 7:37 pm

I'll admit, when Vanguard announced commission-free ETFs, I found myself evaluating several iShares offerings, sector ETFs, etc. Then I re-skimmed Chapter 4 of my copy of The Bogleheads' Guide to the Three-Fund Portfolio. :happy

Initially, I found I was swept up in the excitement of what Vanguard was doing for ETF investors (which is undoubtedly awesome, don't get me wrong) and that was making me want to take part "for taking part's sake". A little self-reflection shook me out of adding the additional complexity/tilting/bets/etc. to my Three Fund.

2015
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Re: Avoiding creeping complexity

Post by 2015 » Wed Sep 12, 2018 11:34 am

ThankYouJack wrote:
Tue Sep 11, 2018 7:15 pm
randomizer wrote:
Tue Sep 11, 2018 3:47 pm

In order to simplify, I took some long-term capital gains and put my ducks back in a row with a three-fund portfolio set-up, and this time I'm really serious about keeping things simple, not just starting simple.

What do you do to stop complexity from creeping into your portfolio? Or don't you care?
I ask myself if I can prove that the added complexity is advantageous. If so, then I factor how much time it's going to take and estimate how much I'll be saving per hour of time. I also factor in if it's going to have an impact on the date I hit my target number (highly unlikely).

Maybe I'm unique in this regard, but I've always had a 3 fund portfolio and the bigger my portfolio gets, the simpler I want it to be. I don't want to micromanage things, especially small $ things. I even check my balance a lot less and rebalance just once a year now.
Thank you for this, as I neglected to state it myself. For example, I spent much time earlier this year calculating ACA savings as a result of PTC and subsidies and felt the time was well worth it. OTOH, I do not personally consider time spent on building the most clever portfolio or investment strategy time well spent.

It's good to remember that complex systems by their very nature require ongoing upkeep, maintenance, and monitoring. Complexity is also subject to fraud, miscalculation, and prone to misjudgment due to vast human behavioral bias/blindness and a faulty decision-making apparatus.

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dual
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Re: Avoiding creeping complexity

Post by dual » Wed Sep 12, 2018 11:46 am

randomizer wrote:
Tue Sep 11, 2018 3:47 pm
There are many reasons to believe that simplicity is an investor's friend,

.....

In order to simplify, I took some long-term capital gains and put my ducks back in a row with a three-fund portfolio set-up, and this time I'm really serious about keeping things simple, not just starting simple.

What do you do to stop complexity from creeping into your portfolio? Or don't you care?
Like you, my portfolio complexity just happened over the years. But I am fortunate to have large unrealized capital gains and cannot make myself pay the many $100k of long term capital gains taxes that would be required.

TravelforFun
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Re: Avoiding creeping complexity

Post by TravelforFun » Wed Sep 12, 2018 11:59 am

People have different levels of complexity tolerance. I have stocks, bonds, mutual funds, ETFs, savings, etc.. and I enjoy keeping track of them on large spreadsheets with linked tabs. Over my investing years, my portfolio has done better than the SP500 but this may not have anything to do with having a more complex portfolio. However, I intend to convert my portfolio to a three-fund portfolio the next few years when I transition into my 70s.

TravelforFun

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Earl Lemongrab
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Re: Avoiding creeping complexity

Post by Earl Lemongrab » Wed Sep 12, 2018 2:34 pm

As I said in the other thread, I don't care about complexity. Modern tools make it just as easy to manage and analyze many holdings versus a few. I willing break apart accounts to generate transfer bonuses.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

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nisiprius
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Re: Avoiding creeping complexity

Post by nisiprius » Wed Sep 12, 2018 2:54 pm

I agree about complexity. It is hard to avoid. I've been trying to squeeze it out gradually for about twelve years now.

One of the tough things for a working couple is that you end up with his-and-hers 401(k)'s. And his-and-hers Roth IRAs. So without even trying, even if you rolled over your 401(k)'s, it was easy to end up with six accounts at Vanguard (his taxable, his rollover, his Roth, her taxable, her rollover, her Roth), and then (in the old days) each of those might fission into mutual fund and brokerage accounts.

For a couple, I think one important issue... let's say past age 50, although, truly, it is true at any time... is that both partners really need to "have the picture" of, broadly, where all the assets are. Now I know a lot of people are going to say "no problem, every six months I download all of my statements and burn them on to a CD, I mean a DVD, I mean a thumb drive, I mean upload them to the cloud, and my partner has a complete, fully up-to-date list of the URLs and the username and the password and the security question answers for all of them." OK, peace, good for you. (I don't actually believe it).

Me, about once a year I ask my life companion to tell me, from memory, the names of all of the institutions where we have financial assets. And I keep noodging her to log into her Vanguard account, where she is supposed to have transaction authority over my account, and actually transfer $100 from any one of my mutual funds to our joint checking account. (It is amazing how often actually trying to do it smokes out a glitch or a problem).
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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